September Investment Notes
How much DCA does a DCA DCA?
Hi all,
First, one quick update. Substack just rolled out a fantastic new program called ‘gift referrals.’ Paid subscribers can now give a free 1-month subscription to up to 5 other individuals. This is a pretty cool offering, so I enabled the functionality. Paid subscribers will receive an email announcing this benefit with directions on how to use it. The recipient needs no credit cards, and no charge is added to the initial subscriber’s subscription.
Pretty cool! And obviously, I’d love it if you shared The Value of Advice with a fellow financial advisor who might enjoy and find value in the concepts we espouse.
A Client Talking Point
Client: Even though the market is down, I’m struggling to decide between dollar cost averaging or investing all my cash right now. What do you suggest?
First, this is an opportunity to learn a lot about your clients, their emotions about money, their behavioral biases, and what is important to them.
For example, I have had clients whose idea of DCAing cash seemed to burden them further. The right emotional decision was to lump-sum invest. More often, as you know, it is the opposite. That’s okay too!
The first question I would ask is?
Tell me more.
Yes, it’s more of an imploration to elaborate, but you get the gist. Tell me more about what you’re feeling, your analysis, your experience, your investment history, your potential feelings of regret, the importance of this money to your financial future, and the emotional significance of it.
Before any facts or charts, I start with ‘Tell me more.”
Then, after exploration, we turn to the facts.
You know, statistically, it makes more sense to lump-sum invest. In fact, about 75% of the time lump-sum investing into stocks outperforms dollar cost averaging. As you know, this is because the stock market goes up more than it goes down.
That said, for the remaining 25% of the time a DCA plan is more emotionally satisfying and will likely lead to a lower average price. So, if the market continues to go down over the short-term, which strategy would bring you more peace of mind?
Remember, the whole point is to get the client invested and help them stay invested while guiding them through any feelings of regret or other emotional turmoil.
The best way to do this? Show them the map. Briefly walk them through both good and bad scenarios. They’ll tell you what feels right to them.
You’d like to DCA? Great. I usually suggest ‘x’ number of months. The buys will start the day the money hits your account and continue, on a monthly basis, until you are fully invested per your financial plan. How does that sound?
An Article to Read
Do you read TKer by Sam Ro? You will undoubtedly enjoy this newsletter if you’re interested in investments and economic analysis. Editor Sam Ro takes a long-term and level-headed approach to most financial topics discussed in the newsletter.
A recent article stood out to me discussing recent Goldman Sachs research on the CAPE ratio.
From TKer:
“We have not found any statistical evidence of mean reversion,” the Goldman Sachs analysts wrote. “Equity valuations are a bounded time series: there is some upper bound since valuations cannot reach infinity, and there is a lower bound since valuations cannot go below zero. However, having upper and lower bounds does not imply valuations are stationary and revert to the same long-term mean.”
You see, it is one thing to say stocks are expensive, and it is another to base your plan on such analysis.
The Shiller CAPE has been above twenty since 2010.
The S&P 500 Index TR has, you know, done okay despite the high valuations, returning 355.1% from 1.1.2010-9.14.2022.
Valuations matter and the data says you should care greatly about the value premium (alongside profitability and small-cap, of course!). However, worrying about the Shiller PE is the wrong way to go about this. At best, it’s a distraction. At worst, it’s disastrously misleading.
A Market Thought
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